Private Incentives for Specialization in a Changing and Unpredictable Labor Market

Technological change is a distinctive characteristic of modern labor markets. New technologies change the demand for different skills in the labor market and thus introduce uncertainty in the wage structure that agents will face in the future. In this way, technological change affects agents decisions about which skills to invest in. In this paper, I study how labor market uncertainty arising from technological change influences the private incentives for specialization. I show that in a world populated by risk-averse agents, technologies that generate a positive covariance of wages across sectors or tasks within sectors will strengthen the incentives for specialization, whereas technological progress that generates a negative covariance of wages will generate strong private incentives for agents to become generalists. Therefore, there is no unique relationship between technological progress and specialization. The nature of the new technologies introduced in the labor market is what matters.